impact of foreign direct investment on economic

European Journal of Accounting, Auditing and Finance Research

Vol.8, No.3, pp.69-85, March 2020

Published by ECRTD-UK

Print ISSN: 2053-4086(Print), Online ISSN: 2053-4094(Online)

69

IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC DEVELOPMENT IN

NIGERIA

1Ugwuanyi, Georgina Obinne Ph.D

Department of Banking and Finance, College of Management Sciences, Michael Okpara

University of Agriculture, Umudike, Nigeria.

2Efanga, Udeme Okon

Department of Banking and Finance, College of Management Sciences, Michael Okpara

University of Agriculture, Umudike, Nigeria.

Email: [email protected]

3Ogochukwu, Chinelo Okanya Ph.D

Department of Banking and Finance, Institute of Management and Technology, Enugu, Nigeria.

ABSTRACT: This study was carried out to ascertain the impact of foreign direct investment on

economic development in Nigeria between 1981 and 2018. Data employed for this study was

elicited from World Bank Data Base-World Developmental Indicators of 2018 and Central Bank

of Nigeria Statistical Bulletin of 2018. This study employed gross fixed capital formation as proxy

for economic development in Nigeria, and exchange rate was employed as a controlled variable

while data on foreign direct investment inflow to Nigeria was adopted as the explanatory variable.

This study employed Auto Regressive Distributed Lag (ARDL) Model to analyze data; other

diagnostic tests such as: stability test, Auto correlation test, Heteroskedasticity test and Breusch-

Godfrey Serial Correlation LM test were also carried out and they confirmed the validity and

reliability of the model employed. The inferential results pointed out that foreign direct investment

impacted positively but insignificantly on economic development in Nigeria between 1981 and

2018. These results also conform to apriori economic expectations. The study recommended that

government of Nigeria should provide enabling environment that will be conducive for doing

business, so as to attract additional inflow of foreign direct investment. Government can provide

enabling business environment by provision of steady supply of electricity and ameliorating or

exterminating insurgent activities in the country and restore confidence of investors to come into

Nigeria and invest, when this is done, the volume of foreign direct investment into Nigeria would

increase and would enhance exports thereby reducing exchange rate.

KEYWORDS: foreign direct investment, economic development, exchange rate, gross fixed

capital formation and auto regressive distributed lag (ARDL) model.


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INTRODUCTION

Background to the study

All the countries in the world at all times seek ways to improve their economies either through

internal business strategies and re-strategizing or external adventures. So when a country seeks

outside its border for business enhancement, economic emancipation and general improvement in

its finances and economy, it is referred to as foreign investment. Foreign Direct Investment (FDI)

has been further described as the long term investment reflecting a lasting interest and control by

a foreign direct investor or parent enterprise of an enterprise entity resident in an economy other

than that of the foreign investor (IMF, 1999). Many African countries including Nigeria have

reformed their economic policy, investment laws and financial system, in order to provide a

conducive environment for private investment (African Economic Outlook, 2006). Sub Saharan

Africa as a region has to depend heavily on FDI for many reasons, some of which are exchange of

scientific research and technological collaboration (Asiedu, 2001). Foreign direct investment

(FDI) has increased dramatically in the past twenty years and with an alarming increase to become

the most attractive and generally accepted type of flow of capital across borders in both developed,

developing and under developed economies.

According to Koojaroenprasit (2012), FDI plays a very big role in economic growth contribution

via technology transfer. The increase in Capital and value addition to human capital is also

associated to FDI inflows (Buckley, Clegg, Wang and Cross, 2002). In Nigeria, FDI is a business

venture or a firm owned by a foreign investor or partly owned domestically.

Statement of problem

Though the market size of African countries keep growing in terms of purchasing power in the

region with its vast population, political instability, internal conflict, poor governance, insecurity

of life and property, and corrupt practices still pose significant problems to many countries in

Africa. Nigeria’s inability to attract the desired level of FDI is as a result of corruption, political,

economic and social instability evidenced in pre and post election crises as well as social unrest in

different parts of the country. The poor performance of the manufacturing sector in Nigeria in

attracting commensurate FDI could be attributed to corruption which affect the cost of doing

business in Nigeria and also hinder investors from investing in the country. Ali and Isse (2003)

observed that in a country with poor economic condition, there is a tendency for such country to

experience high level of corrupt practices which further worsens the rate of development. Odiaka

(2006) observed that the power distribution to the industrial sector in Nigeria remains abysmally

in chronic comatose. Okafor (2008) observed that the country consistently suffers from energy

shortage, a major impediment to industrial, technological and economic growth. In Nigeria it is

one of the many unresolved problems (Ayobolu, 2006), that have critically hobbled and skewed

development.

Nigeria have been stimulating economic development with the help of various technologies

including policies that would aim at foreign capital and technology transfer. It is absolutely

imperative to investigate if economic development can be as a result of an increased inflow of FDI


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into the country over the period (1981-2019). It becomes natural therefore to ask if the economic

development which has been experienced in the economy for the past years was from the proceeds

of foreign direct investment inflow in the country or if the country has already attained this

economic development level before attracting foreign direct investment? However, with all the

FDI operating in the country, the economy is still lagging behind in technology and in knowledge

transfer. Due to this reason, it becomes very difficult to describe the actual direction of the

relationship existing between foreign direct investment and economic development in Nigeria. It

is important to carry out a research to establish the causal relationship and interaction between FDI

and economic development. This however has prompted the major motivation for this study.

Objectives of the Study

The main objective of this research is to ascertain the impact of foreign direct investment on

economic development in Nigeria, while the specific objectives are:

i. To examine the impact of foreign direct investment on Nigerian economic development.

ii. To investigate the impact of exchange rate on Nigerian economic development.

Hypotheses of the Study

HO1: There is no significant impact of foreign direct investment on Nigerian economic

development.

HO2: Exchange rate does not have any significant impact on Nigerian economic development.

REVIEW OF RELATED LITERATURE

Theoretical Review of Literature

Theories of Foreign Direct Investment

Macroeconomic FDI Theories

Lipsey (2004) described the macroeconomic view as seeing FDI as a measure that aid the flow of

capital across national borders measured in BOP statistics. These FDI inflows increase the stocks

and capital formation of the host economy, these include the investment value in firms,

corporations controlled by a home-country investor, or where a home-country investor is given a

right to own a share that gives the investor the voting rights. He elucidated that interest is gotten

from the financial capital inflow, the additional stock that is accumulated by the investing firms,

and the flows of income from the investments. Macro-level determinants that affect the host

country's ability to influence the inflow of FDI into the host country includes the size of the market,

GDP growth rate, economic growth rate, good infrastructures, natural resources, institutional

factors such as the political stability of the country, amongst others. The various theories are

discussed below.

Capital Market Theory

This theory, also known as “currency area theory”, is traced to the earliest theories which explained

FDI. Based on the study of Aliber (1970; 1971), it postulated that capital market imperfections


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give rise to FDI. Foreign direct investment emanated from the differences between the host and

the home country currencies (Nayak and Choudhury, 2014).

According to Aliber (1970; 1971), weaker currencies have a higher FDI-attraction ability and are

better able make use of the differences in the market capitalization rate, compared to stronger

country currencies. Aliber (1970; 1971), further added that source country MNCs based in hard

currency areas can borrow at the rate of interest that is much lower than the host country firms

because portfolio investors may not consider the foreign country MNCs currency.

This gives source country firms the easier accessibility to cheaper borrowed funds for their

investment abroad and subsidiaries than what local firms would access the same funds for. While

this capital market theory is applicable to developed countries including the United States, United

Kingdom and Canada, other scholars saw it differently as ignoring basic currency risk management

fundamentals. A major criticism of Aliber's postulation was another work by Lall (1979), when he

pointed out that Aliber’s theory is not applicable to the less developed countries where there is an

existence of imperfect or absence of functional capital markets and to those with high foreign

exchange rates regulation.

Institutional FDI Fitness Theory As developed by Wilhems and Witter (1998), the term FDI fitness focuses on a country's potential

or resources to attracting, absorbing and retaining FDI. It is a country's ability to meet up to both

the internal and external expectations of its investors, which gives countries the upper-hand in

harnessing FDI inflows. The theory itself made an attempt to illustrate the meaning of uneven

distribution of FDI distribution between the countries concerned.

The institutional FDI fitness theory by Wilhem's is built on these fundamentals which are;

Government, size of the market, educational skills and socio-cultural fitness. First on the pyramid

are socio-cultural factors which according to Wilhelms and Witter (1998) are the oldest and also

most complex of all institutions. The next is education, which the authors affirm to being necessary

in ensuring an attractive environment for FDI as educated human capital enhances R&D creativity

and information processing ability.

The actual level of education is not the requisite for the inflow of FDI into a given region but on

the essential skills needed for the projects to be undertaken. However, educational skills may affect

productivity positively, effectiveness and the efficiency of FDI operations in the country it is

operating. These influences from education such as the ability to speak, hear, and understand

including other educational skills are keys for attracting FDI.

The third on the pyramid is the market which accounts for a large percentage of both the economic

and financial aspects of institutional FDI fitness, in the form of machinery (physical capital) and

credit (financial capital). Well developed and functioning financial markets are hence a prominent

feature in the MNC's investment decision-making process. The fourth and very important on the

pyramid is the Government. The role of a country's political strength plays the biggest role in

attracting FDI.


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Theory of Economic Development

Growth Theory

The idea that economic development should naturally result in the erosion of dualism (in labor and

other markets) establishes a link from classical development economics back to growth theory as

pioneered by Abramovitz and Solow (1911). This, in brief, seeks to break economic growth into

separable components, the most important being (a) growth in the supply of labor and capital, (b)

improvements in the efficiency with which they are allocated between sectors in line with their

marginal productivity, and (c) sector specific improvements in technology. Within this framework,

dual economy models may be viewed as a special case that highlight one historically important set

of barriers to efficient resource allocation. Empirical studies confirm that growth in low income

countries is attributable more to capital accumulation, whereas in high income countries it is

attributable more to technological change.

More sophisticated ‘endogenous’ growth models also incorporate causal links between these

sources of growth, and the effect of increasing returns to scale. For example, technological change

has to be embodied in capital stock and can proceed more rapidly where this is growing. The pace

of technological change in different sectors is also determined by expenditure on research and

human capital accumulation. Economies of scale also result from expansion of the size of markets

and opportunities for specialization. But the relationship between growth and the institutions that

govern resource allocation remain important. In this sense, the dual economy model is just the

leading example of a range of disaggregated models that can accommodate more complex market

fragmentation, and inter-sectoral rigidities. An additional important factor is the contribution to

growth of natural resources. Where abundant, these help to sustain the rate of profit. But natural

resources may also be a ‘curse’ on growth, by attracting labor and capital (and the attentions of

policy makers) away from sectors with higher economies of scale and therefore longer-term

growth potential.

Empirical Review

Macaulay (2012) asserted that Nigeria's foreign direct investment originated from the colonial era,

in which our resources were exploited by foreign government to develop their own economy. In

other to cover up their selfish ambition, they established little investment in Nigeria. But Nigeria’s

FDI became unstable the moment crude oil was found.John (2016), had a similar study on the

effect of FDI on economic growth in Nigeria, with data sourced from CBN. He employed multiple

regression technique as an analytical tool and it was seen that FDI has a positive and significant

effect on GDP. Also, there was a positive but insignificant exchange rate effect on GDP.

Saibu and Keke (2014), in their paper on the impact of Foreign Private Investment (FPI) on

economic growth using annual time series data from Nigerian economy, employed co-integration


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and Error Correction Mechanism (ECM) techniques to empirically analyze if there is any existing

relationship between FPI and economic growth in Nigeria.

The paper revealed that there is a real feedback disequilibria existing between the long-run

economic growth and FPI. It was also brought to the fore that a large amount of capital inflows

were not productively invested, however, the left over capital that was invested, yielded a

significant impact on Nigeria’s economy.

The political environment was seen as unfavourable and overshadowed the significant and positive

impact of FPI in Nigeria. Asogwa and Manasseh (2014), in their study revealed a positive impact

on economic growth in Nigeria as a result of FDI into the manufacturing and telecommunication

sectors while FDI into agricultural sector showed a negative and insignificant impact in the

economy.

Eravwoke and Imide (2013), conducted a study on corruption, FDI and their impact on exchange

rate of Nigerian economy. This study was centered on the empirical investigation of the impact of

corruption, FDI and their impact on the exchange rate of the Nigerian economy.In an attempt to

achieve the objectives of the study, OLS, augmented dickey fuller unit root tests and the co-

integration test were used in the analysis. The variables were all stationary at first difference after

the unit root test and corruption was seen at the extreme in Nigeria which in return depreciates the

naira currency regarding its exchange value to the other currencies of the world. Nwankwo,

Ademola and Kehinde, (2013), carried out a study on the impact of globalization on FDI in Nigeria.

Using both descriptive and narrative method and secondary data for the analysis, the results

indicated substantial benefits of FDI in Nigeria to include: the creation of employment

opportunities, advancement in technology via technology transfer, encouragement of local

enterprises etc. However, there are other factors that impede the full actualization of the benefits

of FDI in Nigeria.

Adejumo (2013), in his study, investigated the relationship existing between FDI and the extent of

the associated value-added to the manufacturing sector in Nigeria. He used ARDL model to

ascertain the relationship between FDI and manufacturing value-added to the economy and in the

long-run, FDI showed both negative and insignificant result. He however, argued that

multinationals presence in the host economy should also influence the private investment on their

economy. Likewise, these investments should not be centered in one sector but should be extended

to other sectors with comparative advantage too to avoid eroding or limiting the potentials and the

capabilities of the nationals. He also instructed that FPI should appreciate the effort of the host

country by providing them with technical know-how, additional skills and good wages.

Solomon and Eka (2013) carried out a study on the empirical relationship between FDI and

economic growth in Nigeria. The study covers from 1981-2009 and data was collated from CBN

statistical bulletin. The study used OLS method to ascertain the relationship between FDI and

Nigerian economic growth. From the result, FDI impacted positively but insignificantly on

Nigerian economic growth.


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Okon, Augustine and Chuku (2012) from another perspective examined the feed-back relationship

between FDI and economic growth in Nigeria. The method used for analysis was single and

simultaneous equation systems and it was discovered that FDI and economic growth are jointly

determined in Nigeria.

Egwaikhide (2012) similarly investigated the relationship between FDI and economic growth in

Nigeria, using Johansen cointegration technique and VEC Method. It was noticed that the impact

of the disaggregated FDI on the real growth in some sectors in Nigeria such as mining, agriculture,

petroleum and manufacturing was very minute even beyond expectations but in exception of the

telecommunication which shows a good sign in the long-run. Furthermore, past level of

infrastructures can encourage FDI.

Omankhanlen (2011) carried out a study on the effect of FDI on the Nigerian economy covering

1980-2009. He specifically studied to ascertain if inflation and exchange rate have effect on FDI

and FDI too has effect on GDP. An econometric model was developed to know the relationship

between current account variables and FDI. It was discovered that FDI impacted positively and

significantly on the current account balance in balance of payment. In other ways, inflation does

not influence the inflows of FDI.

From another view, (Anyanwu, 2011) in his study on FDI, found the major determinants of FDI

in Nigeria to include: domestic investment change, change in domestic market size, policy of

indigenization and change in openness of the economy proxy as BOT. He affirmed that the

abrogation of the indigenization policy in 1995 attracted more FDI inflows into Nigeria, adding

that more should be done to improve the nation’s economic growth so as to fascinate more FDI

into the country. Unsatisfied with a narrow and short-run impact interpretation of the role of FDI,

researchers have tried to incorporate other ways in which FDI influence growth in short and long-

run. They do so using the framework of endogenous growth models. Whenever growth is

endogenized, there are several ways in which FDI influences growth permanently.

Alejandro (2010) carried out another study on FDI and revealed the role played by FDI in the

global business and economic growth. He further explained that FDI has the capacity to provide a

firm with new markets and marketing channels, cheapest production facilities, provision of new

technology, advancement in skills both in management and in labour application and more

importantly finance for both the host country and the foreign firms. Additionally, it can provide

the foreign firms with positive externalities and spillover that can foster strong economic growth.

Okonkwo, Egbunike and Udeh empirically investigated the effect of foreign direct investment on

Nigeria’s economic growth over the period 1990 to 2012. The study made use of ordinary least

squares (OLS) estimation techniques in analyzing the secondary data. The secondary data were

mainly sourced from Central Bank of Nigeria statistical bulletin (CBN), Annual report and

Statement of accounts. The result shows that Export assumes a positive sign which implies that

there is a positive relationship between Economic growth and Export; in conclusion FDI has led

to increase in Export in Nigeria.


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Adigwe, Ezeagba and Francis determined the relationship between foreign direct investment,

exchange rate and gross domestic product. Using time series data, data for the study were collected

from CBN Statistical Bulletin from 2008 to 2013. Pearson Correlation was used to test the

hypothesis with aids of SPSS version 20.0. The findings revealed that there was a significant

relationship between FDI, EXR and GDP, indicated that economic growth in Nigeria is directly

related to foreign direct investment and exchange rate. The paper thereby recommended among

others that there is need for government to be formulating investment policies that will be favorable

to local investors in order to compete with the inflow of investment from foreign countries.

Tubo, Ebierinyo and Captain investigated Foreign Direct investment impact on economic growth

in Nigeria using annual data for 1981 to 2016, from CBN Statistical bulletin 2016. Augmented

Dickey Fuller (ADF), Johansen Co integration, Error Correction Model (ECM) and Pairwise

Granger causality tests were tools of analysis. ADF result showed that all the variables [gross

domestic product (GDP), foreign direct investment (FDI), Gross Fixed Capital Formation (GFCF)

and exchange rate (EXR)] became stationary after differencing once. The ECM showed FDI as

having positive but insignificant impact on GDP, while GFCF is positive and significant. EXR

shows insignificant inverse relationship with GDP. The model speed of adjustment is about 52%.

There exist a one-way causality from FDI to GDP and a bi-directional causality between FDI and

GFCF. Implying that building of durable world class infrastructure that boost’s a country’s capital

sock is needed by government and private sector to enhance FDI inflow, hence economic growth.

Hanson, Efanga, Ekanem and Umoh empirically evaluated Foreign Direct Investment Inflows and

it’s Impact on the Performance of the Nigerian Economy (1981-2017). Auto Regressive

Distributed Lag (ARDL) model and Bounds Test were adopted as the estimating techniques to

verify the existence of long-run relationship between foreign direct investment and economic

growth of Nigeria. Real gross domestic product was used as the dependent variable, while foreign

direct investment, balance of trade and exchange rate were used as the explanatory or independent

variables. Data used were extracted from the Central Bank of Nigeria statistical bulletin of 2018.

The empirical results of Auto Regressive Distributed Lag (ARDL) model revealed that all the

variables except exchange rate had positive and significant impact on real gross domestic product.

Exchange rate had a negative and insignificant impact on real gross domestic product. This study

recommended that government should create an enabling environment which would attract foreign

investors into Nigeria, such as good, transparent and fair tax system, promotion of economic

stability and the attainment of key macroeconomic objectives.

METHODOLOGY

Research Design

This study adopts the ex-post facto research design as it deals with event that had taken place and

secondary data were readily available for collection. Gross Fixed Capital Formation being a proxy

for economic development was adopted as the explained variable, while Foreign Direct Investment

was employed as the explanatory variable and exchange rate was used as the control variable. The

model was estimated using Auto Regressive Distributed (ARDL) Model. Since we are making use

of annualized time-series data and the study covers a long sample period, we made sure our data


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set were not impaired by unit root; hence we tested for stationarity of the series by employing the

Augmented Dickey-Fuller (ADF).

Sources of Data Collection

Data for this study were extracted from World Bank Data Base- World Developmental Indicators

of 2018 and Central Bank of Nigeria Statistical Bulletin of 2018. The study period covers 1981

through 2018.

Method of Data Analysis

This study employed descriptive statistics, unit root test, correlation, serial correlation test,

heteroskedasticity test, normality test, stability test and Auto Regressive Distributed (ARDL)

Model during the study. E-view 9.0 econometric statistical software package was used for the

analysis.

Model Specification

This research adapted the economic model previously used by Hanson, et al (2020) that researched

on foreign direct investment inflows and its impact on the performance of the Nigerian economy

(1981-2017). The econometric model of this study, which had earlier been reviewed in the

preceding section, is specified below:

RDP= β0+ β1 FDIt +β2 EXRt + β3BOT+ ųt…. …………………………………………….. (3.1)

RDP = Real Gross Domestic Product

FDI = Foreign Direct Investment

EXR = Exchange Rate

BOT = Balance of Trade

ɥ = error term

β0 = Constant

β1 and β2 = Coefficients of their respective variables

t = Time dimension

However, this study adapted the scholars’ work by replacing real GDP with gross fixed capital

formation as the explained variable; balance of trade was also excluded in order not to over-stock

the parameters of the model; exchange rate was maintained as a controlled variable. In that regard,

the regression model is specified thus:

GFCF=β0+β1FDI+β2EXR+εi..................................................................................................... (3.2)

Where; GFCF = Gross Fixed Capital Formation

ε = Error term and other acronyms in the model remain as explained above.

Decision Rule for Acceptance or Rejection of Hypotheses

The decision rule is to reject the null hypothesis if the computed p-value is less than 5% significant

level. On the contrary, accept the null hypothesis if the computed p-value is higher than 5%

significant level.

Expected Results Foreign Direct Investment is expected to be positively signed.

Exchange rate is expected to be negatively signed.


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DATA ANALYSIS AND INTERPRETATION OF RESULTS

Estimation Test Result (Unit Root Test)

Table 4.1 Unit Root Test

Variables Augmented

Dickey-Fuller

test statistic

Probability

Value

Critical value

at 5%

Integration

order/Inference

GFCF -3.450749 0.0153 -2.943427 I(0)

FDI -7.267147 0.0000 -2.945842 I(1)

EXR -3.537770 0.0125 -2.945842 I(1)

Source: Author’s analysis using e-view 9 output

The unit root test from table 4.1 above shows that the integration order of the variables were a

combination of I(1) and I(0). As such, the appropriate estimation technique to employ for analysis

is the Auto Regressive Distributed Lag (ARDL) Model.

Descriptive Statistics

Table 4.2 Descriptive Statistics

Source: Authors’ analysis using e-view 9 output

The result of the descriptive statistics in table 4.2 above reveals the aggregative averages such as

mean, median, and the measures of spread and variation like standard deviation. Skewness which

measures the degree of symmetry shows that GFCF, FDI, and EXR are positively skewed. As per

the kurtosis which measures the peakedness of the observations, the values of GFCF, FDI, and

EXR are above 3, hence lepturkotic. These skewness and kurtosis indicate departure from

normality although such point is not strong enough to discredit the goodness of the dataset for the

analysis in view.

Correlation Analysis

Table 4.3 Correlation matrix

GFCF FDI EXR

GFCF 1.000000

FDI -0.193804 1.000000

EXR -0.515865 -0.262251 1.000000


GFCF FDI EXR

Mean 36.47387 1.387343 104.4552

Median 35.36755 1.384466 111.1675

Maximum 89.38105 4.282088 306.1000

Minimum 14.90391 0.257422 4.536700

Std. Dev. 19.36187 0.855130 78.39935

Skewness 1.009675 1.208768 0.719999

Kurtosis 3.683025 5.208173 3.421495

Jarque-Bera 7.195132 16.97413 3.564487


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From the result of correlation analysis in table 4.3 above, both FDI and EXR variables were

negatively correlated with GFCF having about -19.4% and -52% for FDI and EXR respectively.

Inferential Result

Results of ARDL Model

Table 4.4 Results of ARDL Model

Variable Coefficient Std. Error t-Statistic Prob.*

GFCF(-3) 0.337967 0.134391 2.514808 0.0177

FDI 1.048775 0.844548 1.241819 0.2243

EXR -0.027172 0.012206 -2.226156 0.0339

C 8.419416 3.786140 2.223747 0.0341

R-squared 0.938564 Mean dependent var 32.42682

Adjusted R-squared 0.927971 S.D. dependent var 13.83630

S.E. of regression 3.713407 Akaike info criterion 5.616582

Sum squared resid 399.8924 Schwarz criterion 5.883213

Log likelihood -92.29018 Hannan-Quinn criter. 5.708623

F-statistic 88.60685 Durbin-Watson stat 1.618465

Prob(F-statistic) 0.000000


The ARDL result as shown in the table above suggests that exchange rate had a negative or inverse

impact on gross fixed capital formation while foreign direct investment was recorded to have a

positive impact on gross fixed capital formation in Nigeria. The result further revealed that a unit

increase in foreign direct investment would bring about a 1.4 unit increase in gross fixed capital

formation. Also, a unit increase in exchange rate would bring about approximately 0.03 unit

decrease in gross fixed capital formation and vice versa. The Adjusted R-squared of approximately

0.94 showed that the explanatory variables accounted for about 94% variations in the explained

variable. Put differently, about 94% variations in gross fixed capital formation was explained by

the independent variables, while the remaining 6% may be attributed to variables not included in

the model.

F-statistic of 88.61 showed that the model is a good fit as confirmed by its corresponding

probability value of 0.000000 which means that the model is significant both at 1% and 5% levels

of significance.

Durbin-Watson stat. of 1.6 suggests that the variables are free from auto-correlation since it is very

close to 2.


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Test for Auto Correlation

Table 4.5 Correlogram Q-Statistic Autocorrelation Partial Correlation AC PAC Q-Stat Prob*

. |*. | . |*. | 1 0.102 0.102 0.3988 0.528

. |*. | . |*. | 2 0.160 0.151 1.4065 0.495

. |*. | . |*. | 3 0.211 0.188 3.2048 0.361

.*| . | .*| . | 4 -0.135 -0.202 3.9655 0.411

. | . | . | . | 5 0.030 -0.003 4.0043 0.549

.*| . | .*| . | 6 -0.146 -0.153 4.9622 0.549

. | . | . |*. | 7 0.011 0.118 4.9677 0.664

.*| . | .*| . | 8 -0.074 -0.088 5.2311 0.733

.*| . | . | . | 9 -0.083 -0.010 5.5737 0.782

. | . | .*| . | 10 -0.033 -0.096 5.6298 0.845

.*| . | .*| . | 11 -0.163 -0.088 7.0690 0.793

. | . | . | . | 12 -0.010 0.002 7.0743 0.853

.*| . | .*| . | 13 -0.144 -0.093 8.2875 0.824

.*| . | .*| . | 14 -0.160 -0.137 9.8658 0.772

. | . | . | . | 15 -0.041 -0.040 9.9766 0.821

.*| . | .*| . | 16 -0.169 -0.103 11.915 0.750

Source: Author’s analysis using e-view 9 output with data in Appendix

This test is carried out to further test for auto correlation and to consolidate the result of Durbin

Watson Stat. The result of Correlogram Q-Statistic in table 4.5 above, suggest that the variables

are free from auto correlation.

The correlogram Q- Stat. table indicates that all p-values were >5% hence the conclusion that the

model was free from auto correlation.

Test for Serial Correlation

Table 4.6 Serial Correlation Breusch-Godfrey Serial Correlation LM Test:

F-statistic 2.486554 Prob. F(2,27) 0.1021

Obs*R-squared 5.443912 Prob. Chi-Square(2) 0.0657


In line with the rules, the Breusch-Godfrey Serial Correlation LM Test table above shows that the

probability values of 0.1021and 0.0657are statistically insignificant at 5% level of significance.

That is, the p-values (< 5%) Thus, the model is said to be free from serial correlation.


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Test for Heteroskedasticity

Table 4.6 Test for Heteroskedasticity

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 2.526918 Prob. F(5,29) 0.0513

Obs*R-squared 10.62123 Prob. Chi-Square(5) 0.0594

Scaled explained SS 8.666760 Prob. Chi-Square(5) 0.1231


The Heteroskedasticity test above suggests that the variables are free from the problem of

Heteroskedasticity since the p-values of F-stat. and Obs*R-squared of 0.0513 and 0.0594

respectively are > 5% significance level. This outcome is further strengthened by the p-value of

the Scaled explained SS (0.1231) which also suggest the absence of Heteroskedasticity.

Stability Diagnostic Test

Table 4.8 Ramsey RESET Test

Equation: UNTITLED

Specification: (GFCF) GFCF(-1) GFCF(-2) GFCF(-3) FDI2

EXR C

Omitted Variables: Squares of fitted values

Value Df Probability

t-statistic 0.250670 28 0.8039

F-statistic 0.062836 (1, 28) 0.8039


From the Ramsey reset test result in table 4.9 above, the t-statistic of 0.250670 and its

corresponding p-value of 0.8039 suggest that the model is correctly specified, so null hypothesis

of linear specification not rejected at 5% level of significance. That is, p-value (<5%).

Test of Hypotheses

4.9.1 Test of Hypothesis One Variable Coefficient Std. Error t-Statistic Prob.*

FDI 1.048775 0.844548 1.241819 0.2243

C 8.419416 3.786140 2.223747 0.0341

Source: Extracted from table 4.4

HO1: There is no significant impact of foreign direct investment on gross fixed capital formation

in Nigeria.


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82

Since the p-value for foreign direct investment (FDI) of 0.2243 (22.4%) is >5% level of

significance, the null hypothesis that there is no significant impact of foreign direct investment on

gross fixed capital formation in Nigeria is accepted.

Test of Hypothesis Two

Variable Coefficient Std. Error t-Statistic Prob.*

EXR -0.027172 0.012206 -2.226156 0.0339

C 8.419416 3.786140 2.223747 0.0341

Source: Extracted from table 4.4

HO2. Exchange rate does not have any significant impact on Nigerian economic development.

Since the p-value for exchange rate (EXR) of 0.0339 (3.4%) is within the acceptable significance

level of 5%, that is, < 5%, we reject the null hypothesis that Exchange rate does not have any

significant impact on Nigerian economic development.

Apriori Economic Expectation Result

The result is evaluated based on economic theories and literatures in line with what is obtainable

in Nigeria and what is applicable all over the world.

Table 4.10 Apriori Expectation

Variables Expected Signs Actual Signs Remark

FDI Positive ( + ) Positive ( + ) Conform

EXR Negative ( - ) Negative ( - ) Conform

DISCUSSION OF RESULTS

This study was conducted to ascertain the impact of foreign direct investment on economic

development in Nigeria between 1981 and 2018. From the results, it can be deduced that there

exists an insignificant positive relationship between FDI and GFCF, while there exists a negative

significant relationship between EXR and GFCF.

The findings of this study are in congruence with the studies of Tubo, Ebierinyo and Captain and

Solomon and Eka (2013) but in negation to the studies of: Asogwa and Manasseh (2014), John

(2016), Adigwe, Ezeagba and Francis and Hanson et al. (2020).

CONCLUSION AND POLICY RECOMMENDATIONS

Conclusion

The main objective of this research is to ascertain the impact of foreign direct investment on

economic development in Nigeria between 1981 and 2018. This study employed gross fixed

capital formation as a measure of economic development in Nigeria, while data for foreign direct


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83

investment into Nigeria was employed as proxy for foreign direct investment, exchange rate was

employed as a controlled variable all in an attempt to ascertain the impact of foreign direct

investment on economic development in Nigeria. From the inferential results, it is pertinent to

submit that foreign direct investment though recorded a positive impact on economic development

in Nigeria; its impact was insignificant because of the infinitesimal amount of foreign direct

investment into Nigeria between the periods under review. Exchange rate recorded a negative and

significant impact on gross fixed capital formation and also conforms to apriori expectations as

shown in table 4.11.

Conclusively, it will be proven statistically accurate and reliable to deduce that foreign direct

investment had an insignificant impact on gross fixed capital formation in Nigeria, as such, we

accept the null hypothesis that foreign direct investment had no significant impact on economic

development in Nigeria.

Policy Recommendations

Based on the results of the inferential analysis above, this study proffers the following

recommendation:The government of Nigeria should provide enabling environment that will be

conducive for doing business, so as to attract additional inflow of foreign direct investment by

fighting and reducing corruption, provision of steady supply of electricity and ameliorating or

exterminating insurgent activities in the country in order to restore confidence of investors to come

into Nigeria and invest. By doing that, we believe that the volume of foreign direct investments

into Nigeria would increase and would enhance exports thereby improving capital formation base..

2. The government of Nigeria should also formulate and implement favorable exchange rate

policies in order to facilitate and encourage low exchange rate which would in turn become the

catalyst for export and increase the purchasing power of the naira.

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